About Piponomics

Economics plays a huge role in the foreign exchange market. I enjoy looking at economic trends and trying to see how it may affect currencies, and life in general. I will post my thoughts and observations here. I'm throwing macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully the final product are lessons about the FX market that's easy to understand.

Trading the U.K. Retail Sales Report

First of all, if you plan on trading a news report, you should know exactly what you’re getting yourself into. The first question you should ask yourself is this:

What the heck is the U.K. retail sales report?!

The U.K. retail sales report measures the month-on-month growth of sales on the retail level. It basically measures whatever British consumers spend their hard earned pounds on. It includes household goods, clothing, footwear, fuel and other consumer goods.

Many traders and analysts pay attention to the report, because it is reflective of the current state of the economy. If sales growth is high, people are spending and the economy should be booming. If growth is stagnant or even negative, it could mean that the economy is struggling.

Taking a look at the recent results, we can see that month-on-month retail sales growth has been all over the place.

Not only has there been no consistent trend of positive growth, but over the past 6 releases in 2011, actual results have been far off from initial estimates. Now, tomorrow’s report is projected to come in to show growth of 0.6%.

Considering the 2011 trend of the actual figure being way off the estimated number, chances are that we’ll see yet another surprise in the markets, which could spark some major volatility in GBP/USD.

Don’t worry though, Forex Gump is here to make sure that you’re prepared and know what to do when the report hits the airwaves!

How do we trade the report?

Before coming up with a strategy, let’s take a look how the last two releases affected GBP/USD.

For the May release, the actual figure was slightly above forecast. It sparked an immediate rally and catapulted GBP/USD to 1.6200 from 1.6150. You could say that the market was rational since GBP/USD rose on a better-than-expected figure. GBP/USD eventually closed the U.S. trading session higher.

For the June release, the same “rational” thing happened: the retail sales report came in significantly below expectations and led to a drop in GBP/USD. From around 1.6170, GBP/USD dropped as low as 1.6078 before retracing.

So basically we know the following things:

The retail sales report has missed forecast the last six times

GBP/USD’s price action is positively correlated to the actual results

GBP/USD moves around 50-100 pips after the release

For the upcoming report, I suspect something similar will probably happen to the pair. We will most likely see the retail sales report NOT meet expectations and come in either below or above forecast.

If the actual figure is better than expected, then we could see GBP/USD close the day 50-100 pips higher. On the other hand, if the actual number is worse than predicted, then GBP/USD could end up ending the day 50-100 pips lower.